The best real estate plays in 25 years

The global real estate market in 2039 will be city-centric, with an increased focus on Asia and other emerging markets, and more investment by the public, according to senior executives at some of the world's largest investment firms.

"Asia will be the future of real estate over the next 25 years," said Jonathan Gray, who manages about $79 billion for clients as global head of real estate for the Blackstone Group (BX). "The largest investment markets will be in China, India and other countries in the region given their rate of growth. Both public and private real estate markets will be much, much bigger."

A common criticism of Asian economic growth is the relative disregard for the environment. That concern could be a long term investment opportunity, such as taking advantage of high pollution in China, according to LaSalle Investment Management, a $47.6 billion real estate investment firm.

"Although China will be switching over to renewables by 2039, concerns about unhealthy air will be so intense after two decades of respiratory diseases that they could likely pioneer buildings with filtered air, oxygen supplements and artificial light to replace lost sunlight," said Jacques Gordon, LaSalle's head of global research and strategy.

Key to Asia's rise in real estate will be the increasing importance of its urban centers, a global theme.

"Megacities will continue to grow and dominate in the U.S. and aboard," said Blackstone's Gray.

He said such cities as London, Sydney, Paris, Rome and Barcelona will continue to grow quickly as they consolidate their power as hubs of knowledge-based industries like technology, finance and media.

The best cities will also be boosted by a boom in lodging.

"The hotel business will be a huge beneficiary of rising global affluence and tourism, especially from China," said Gray, who is also the chairman of global hotel business Hilton Worldwide.

Generally, those cities will widen in value in comparison to nearby rural and suburban areas. The U.S. will be no exception in 2039, according to Gray.

"In the U.S., the value of real estate in the great cities will continue to grow much faster than in the rest of the country. There will be even wider spreads between the cost of housing in, say, New York City versus New York state," he said. "This next 25 years I believe urban America will grow faster than suburban America."

Grey said gentrification would continue to expand the reach of large cities like San Francisco (via Oakland), London (moving north); and New York (via Queens and The Bronx).

The city trend also applies to frontier and emerging markets.

"Rapidly urbanizing cities in the frontier markets of Africa and Southeast Asia will benefit from favorable demographics, cheap labor and a rising middle class," said LaSalle's Gordon.

Gordon said the cities most likely to benefit include Accra in Ghana, Lagos in Nigeria, Nairobi in Kenya, Johannesburg in South Africa, Jakarta in Indonesia, and Phnom Penh in Cambodia.

LaSalle isn't the only one bullish on the future of real estate in Africa.

"Since there is no liquidity and very little transparency in their markets, correctly formulated investments will provide extraordinary returns as Africa redefines itself in oil and gas, agriculture and minerals," Barrack added.

Those views on developing markets echo a recent report by McKinsey & Co. on the coming shift of large companies into now-less developed countries.

The global consulting firm estimates that more than 45 percent of the Fortune Global 500 could be based in emerging regions by just 2025, up from 5 percent in 1990 and 17 percent in 2010. There will also be three times as many large company headquarters in emerging regions as in 2010 by 2025.

A more public marketplace

Real estate in 2039 will be marked by more public investment, not just regional shifts.

"The desire to own real estate will be high. A greater and greater percentage of properties will end up in the public markets—a lot more than where we sit today," said Gray.

He projects that real estate investment trusts, which trade like stocks, will increasingly be used by retail investors. And real estate debt will be held more broadly; it won't just be banks and big institutions anymore, according to Gray.

He noted that the bond-like nature of real estate investing—relatively steady returns with the chance at appreciation in value—will appeal to aging investors looking for more stable assets to park money in.

Another prediction for 2039 is the importance of real estate related to the information economy.

"The future property barons will most likely be those that harvest and feed 'intellectual property'—broadband, Internet, digital distribution and content will provide the same development opportunities that existed in the past 100 years for 'real property,'" said Barrack.

An evergreen investment

Generally, investors are confident that real estate will continue to offer attractive investment opportunities in 25 years.

"High quality, reasonably leveraged real estate is a capital preservation proxy in every cycle," said Barrack.

In the U.S., he said, housing will "always remain as a primary playbook for stimulating the U.S. economy" and "homeowners will continue to believe that increased home equity is a faster highway to creating wealth than accumulating wealth by working for a living."

Gray agreed that real estate can only become more valuable.

"Twenty-five years from now, we can't say what's Facebook (FB) going to be, what's Apple (AAPL) going to be, or Google (GOOG)," he said. "But 25 years from now, we can be confident that 345 Park Avenue will still be an office building and it will be worth a lot more than it is today."